AstraZeneca Rejects Pfizer's Latest Offer - Analyst Blog

AstraZeneca AZN announced that it has rejected Pfizer's PFE latest takeover proposal. AstraZeneca stated that the proposal was inadequate and grossly undervalued the company. Apart from that, the company also raised certain concerns regarding the transaction structure (low proportion of cash, high proportion of Pfizer shares) and risks related to the proposed inversion structure (Pfizer's intention to redomicile to the UK for tax purposes).
 
Pfizer's Improved Proposal

On May 2, 2014, Pfizer confirmed an improved takeover proposal. The new proposal valued AstraZeneca at £50.00 (approximately $84.47) per AstraZeneca share (comprising 1.845 shares in the combined entity and 1,598 pence in cash). It represented a more than 7% increase over the earlier proposal value of £46.61 (approximately $76.62) per AstraZeneca share.

The latest bid represents a premium of approximately 32% to AstraZeneca's closing price of £37.82 on Apr 17, 2014 before the takeover rumors started circulating.

We expect Pfizer to come up with a new proposal shortly.

If the deal goes through, it will lead to the formation of a new company incorporated in the UK and with head offices in New York. The company will be listed in the NYSE.

Pfizer expects that the potential merger would be accretive to its earnings (in the first full year following the merger) and accelerate its earnings growth pace. Apart from that, the company expects to realize significant operational synergies benefiting from better capital efficiency and a more efficient tax structure.

Our Take

We note that AstraZeneca has been struggling with a number of patent expiries. Earnings have also seen a declining trend in the past several quarters. For 2014, the company expects core earnings to decline in the teens. Its acid reflux management drug, Nexium, which generated $3.9 billion sales in 2013, is set to go off patent in late May this year.

However, we still believe that AstraZeneca is an attractive acquisition target based on its pipeline, product portfolio and presence in a number of countries. The company has a number of immune-mediated therapies for cancer, in the pipeline. Additionally, a number of products including Forxiga and Xigduo (for type II diabetes) and orphan drug Myalept (complications of leptin deficiency, in addition to diet, in patients with congenital generalized or acquired generalized lipodystrophy) have gained approval in recent quarters.

AstraZeneca currently holds a Zacks Rank #3 (Hold), while Pfizer carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the health care sector include Allergan AGN and Gilead Sciences Inc. GILD. While Allergan carries a Zacks Rank #2 (Buy), Gilead sports a Zacks Rank #1 (Strong Buy).